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Were Hedge Funds Right About Flocking Into Eldorado Resorts Inc (ERI) ?

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 13.1% in the 2.5 months of 2019 (including dividend payments). Conversely, hedge funds’ 15 preferred S&P 500 stocks generated a return of 19.7% during the same period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Eldorado Resorts Inc (NASDAQ:ERI).

Is Eldorado Resorts Inc (NASDAQ:ERI) an exceptional stock to buy now? Money managers are buying. The number of bullish hedge fund positions advanced by 5 recently. Our calculations also showed that ERI isn’t among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

BRIDGER MANAGEMENT

We’re going to take a peek at the latest hedge fund action encompassing Eldorado Resorts Inc (NASDAQ:ERI).

Hedge fund activity in Eldorado Resorts Inc (NASDAQ:ERI)

At Q4’s end, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ERI over the last 14 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

ERI_apr2019

More specifically, Highline Capital Management was the largest shareholder of Eldorado Resorts Inc (NASDAQ:ERI), with a stake worth $82.8 million reported as of the end of September. Trailing Highline Capital Management was Park West Asset Management, which amassed a stake valued at $62.6 million. Lafitte Capital Management, Bridger Management, and Shellback Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Consequently, key money managers have been driving this bullishness. Park West Asset Management, managed by Peter S. Park, established the biggest call position in Eldorado Resorts Inc (NASDAQ:ERI). Park West Asset Management had $54.3 million invested in the company at the end of the quarter. Ken Grossman and Glen Schneider’s SG Capital Management also initiated a $22.9 million position during the quarter. The other funds with new positions in the stock are Brian Gustavson and Andrew Haley’s 1060 Capital Management, Jonathan Litt’s Land & Buildings Investment Management, and Alexander Mitchell’s Scopus Asset Management.

Let’s now review hedge fund activity in other stocks similar to Eldorado Resorts Inc (NASDAQ:ERI). These stocks are Magnolia Oil & Gas Corporation (NYSE:MGY), The Boston Beer Company Inc (NYSE:SAM), Avista Corp (NYSE:AVA), and Uniti Group Inc. (NASDAQ:UNIT). This group of stocks’ market caps are similar to ERI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MGY 32 264461 -5
SAM 19 266550 5
AVA 18 265879 1
UNIT 14 218877 0
Average 20.75 253942 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $254 million. That figure was $492 million in ERI’s case. Magnolia Oil & Gas Corporation (NYSE:MGY) is the most popular stock in this table. On the other hand Uniti Group Inc. (NASDAQ:UNIT) is the least popular one with only 14 bullish hedge fund positions. Eldorado Resorts Inc (NASDAQ:ERI) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on ERI as the stock returned 37.6% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.

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